Filling Up

It's a great first step, but we're going to have to get to where all cars can use E15.

There is only one statement that can be made with any certainty regarding the ethanol market in 2011. More ethanol will be produced than will be required to be blended under the renewable fuel standard (RFS). That's an easy prediction to make because the industry is already making more ethanol than refiners are required to use. The total RFS requirement for 2011, which includes all renewable fuels, is 13.95 billion gallons. Current estimates show that the national ethanol capacity is more than 14 billion gallons, and millions of additional gallons are expected to come online next year. Production is not expected to become a concern for several years, and even that is debated by members of the industry who insist that ethanol producers will continue to rise to meet demand at any level. So the million dollar question will continue to be: how do we squeeze more ethanol into the shrinking gasoline pool?

Market Expansion
Recently, ethanol usage has grown fairly steadily despite lower overall gasoline consumption. Because the cost of ethanol has remained competitive compared to traditional gasoline, refiners have engaged in significant amounts of discretionary blending in markets that were previously untapped. In addition, new state mandates, particularly California's requirement that increased ethanol blend requirements from 5.7 percent to 10 percent, have also helped increase ethanol demand. Chris Highsmith, senior commodities research and strategy analyst for ethanol marketing firm Eco-Energy Inc., says demand for ethanol increased by about 2 billion gallons in 2010 compared to the previous year. "A lot of markets have picked up," he says. "California going to E10 was instrumental to that. It's the largest gasoline market in the U.S., so that accounted for a big piece of it."

Areas in the Southeast have experienced recent increased demand for ethanol, but Highsmith says Florida and many of the coastal markets are saturated. Parts of Mississippi, Louisiana and much of Alabama, however, offer room for expansion. "You have areas down there that still have growth room that are relatively large gasoline markets, but the impact would come in a place like Texas," he adds. He expects Texas, the second largest gasoline market in the country, to provide a new growth area for ethanol over the next two years. "It's been growing and will probably continue to grow," he says. "If Texas started blending ethanol in all of its gasoline, that would pick up 250-300 million gallons of ethanol." Texas has traditionally been an anti-ethanol state, so the prospects of it implementing an E10 mandate are not likely, but the federal mandate may soon not leave Texas blenders any choice. "Historically, the mandate has been less than 10 percent of the gasoline pool, but that's changing," Highsmith says. "We're ramping up to 15 billion 15 billion gallons is already over 10 percent of the gasoline pool and that pool is falling."

On a smaller scale, western states such as New Mexico, Utah, Idaho and other relatively remote locations in the Rocky Mountains have been so far been left untapped. Highsmith says these markets lack blending infrastructure and refiners have not had the incentive to begin blending heavily in these markets. But as the blend wall creeps closer "they're going to have to blend ethanol in every gallon they can to meet the RFS2 obligation," he says, and E10 may begin to be utilized those areas as well. The long shot for ethanol blending will continue to be Alaska, which according to some estimates currently uses E10 for only about 10 percent of its total gasoline supply.

Infrastructure Modifications
Eco-Energy markets a little more than 1 billion gallons of the ethanol produced in the U.S., according to CEO Chad Martin. In order to ensure that his business, and, consequently, the ethanol industry, continues to grow, Martin says Eco-Energy places an emphasis on overcoming logistical issues in new markets. Eco-Energy had a hand in solving infrastructure problems in large markets on the East Coast such as Washington, D.C., and Atlanta as well as in the Carolinas, he says. The company is now focusing on hurdling logistical barriers in mid-size markets, which Martin believes is the next level that needs infrastructure work. "That's an area of focus for us and our marketing partners, to make sure that we can get their product into some of these markets and create solutions," he says. "If there are logistical constraints or issues, we work with the terminal operator to try and find a solution. If we can't find a solution with the terminal operator, we look for a trans-load operator or a development opportunity to make sure we can get product into some of the more difficult-to-reach markets."

E85 and Mid-Level Blends
The wild card for ethanol marketing in 2011-'12 will be E15. If the partial waiver for 2007 and newer vehicles is not expanded to include older models, its chances of impacting the ethanol market are slim. Highsmith's early prediction is that, at most, 5 percent of retail stations will offer E15 to their customers. "That's probably even a high number," he adds. "It really depends how fast they can work out some of the liability issues. There will be some parties blending it, maybe some jobbers and smaller stations. But any large operation that guarantees their fuel isn't going to want to put themselves out there for that liability. It also depends on price. If there's incentive, people will find a way to blend it."

Highsmith's sentiment is echoed by Kent Satrang, CEO of Petro Serve USA, a cooperative retail fuel provider that operates about a dozen fueling stations in North Dakota and Minnesota. He says he is considering offering E15 at just one of the company's fleet of stations. "I think E15 is well-intentioned, but it really isn't going to be very effective when it's only for 2007 and newer cars because we have to offer gas to all cars, not just to 2007 and newer," he says. "It's a great first step, but we're going to have to get to where all cars can use E15." He doubts that fuel retailers in North Dakota will offer E15 even if the waiver is extended to include vehicle models 2001 and newer. The problem lies in station infrastructure, he says. Many of Petro Serve's stations have blender pumps, but that doesn't make a decision to add a new blend any easier. "I don't know what we would take out to put in E15," he says. "I've asked a lot of people in the ethanol industry and really haven't gotten a good answer yet. I don't think there really is one." The one station that Satrang will consider offering E15 at has a pump with five dispensers and he would replace E20 with E15. But there are very few stations with equipment that offer so many options.

From a retail perspective, Satrang believes blender pumps will be the ethanol industry's best bet to increase market share. In 2007, Petro Serve had the No. 1 E85-selling station in the U.S., dispensing an average 50,000 gallons of the fuel per month. Following that success, and with the help of a North Dakota legislative incentive, the company began installing blender pumps at its locations last year. The company now offers regular gas, E10, E30 and E85 at most of its stations. The results have been "spectacular," according to Satrang. "It has been amazing," he says. "Where we had E85 before and where we've put in blender pumps, our sales for renewable fuels are up 500 percent."

If the USDA follows through with its recently announced promise to cover half of the costs associated with installing 10,000 blender pumps over five years, success stories like Petro Serve's may become more common. But it will take time. According to Growth Energy, there are currently only about 250 blender pumps nationwide. With more than 150,000 retail fuel stations located in the U.S., there is a clear need for aggressive campaigns to increase blender pump installations, particularly in large markets, and all of the industry's representative groups have waged efforts to do just that. The Renewable Fuels Association and the American Coalition for Ethanol teamed up last year to form the Blend Your Own Ethanol campaign, which is geared toward informing marketers and retailers of the benefits of blender pumps and what incentives are available. Robert White, market development director for the RFA, says blender pumps give fuel retailers a chance to one-up their competition by offering a fuel that others may not have. And what benefits the retailers will, in turn, benefit the ethanol industry. "Between the blender pumps goals of the BYO Ethanol campaign and that of USDA, ethanol blended above 10 percent will be greatly more available in the coming year," he says.

Growth Energy also believes in the power of blender pumps. This summer the group began lobbying for its Freedom Fueling plan, which includes a proposal to incentivize 200,000 blender pumps and to require all vehicles sold in the U.S. be flex-fuel capable.

Uncertainty Remains
For the short-term, discretionary blending by refiners will continue to be the key for keeping the blend wall at bay. In late October, however, several unresolved factors left room for speculation as to whether price incentives would continue to tempt refiners to overblend. If an extension is not granted for the Volumetric Ethanol Excise Tax Credit, margins may be less attractive and refiners may be less likely to partake in discretionary blending. Likewise for the 54-cent-per-gallon import tariff on Brazilian ethanol. If it's allowed to expire on Dec. 31, it could impact the use of domestic ethanol by refiners. Or, it could not. It all boils down to nickels and pennies for fuel companies. "It really depends on what happens with [Brazil's] currency," Highsmith says. "Their currency has been very high against the U.S. dollar compared to where it's been historically. At that level, their exports don't look so great."

On the flip side, U.S. exports of ethanol reached an all-time high in 2010 and that could continue into next year, but it's doubtful that export levels will increase enough to impact supply and demand issues domestically. The U.S. DOE's Energy Information Administration said in October that the U.S. will consume 35.5 million gallons of ethanol this year, which is just a little more than 10 percent of the total gasoline supplied. For 2011, the EIA predicts a slight increase for both gasoline and ethanol consumption, and virtually no increase in ethanol's percentage of the market. But in a letter sent to U.S. EPA Administrator Lisa Jackson to announce its 2011 predictions, EIA Administrator Richard Newell admits the agency's forecasts are "inherently uncertain" and compares actual 2010 data with predictions made in 2009 to illustrate how the markets can change. Actual gasoline supplied in 2010 decreased by 0.7 percent compared to the EIA's 2009 forecast. Meanwhile, ethanol consumption increased by a full 7 percent, up 55,000 barrels per day over the EIA's 2009 prediction.